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Author: Mark12547 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121261  
Subject: How much Refund too much? Date: 2/9/2006 10:25 PM
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I'm curious: how much of a tax refund is considered too much? I doubt that the IRS cares, but as far as a cash flow issue and deploying the money in investments earlier, what do Fools think?

I know ideally one would come out with zero refund, or even owing the "safe harbor" amount.

But if the refund is a couple hundred dollars, is that worth sweating over? Or half a grand ($500)? I would have second thoughts for a grand ($1,000) unless it was an unusual situation that I thought wouldn't normally repeat.

Many of us here on Fool.com have investments, with variations on how much we get in dividends each year, and hopefully some of us have kind hearts but again with variation each year on how much we contribute to our favorite 501(c)(3) organizations. The result is we can't accurately predict what our income and itemized deductions will be, so getting it spot on might not be attainable. (E.g., to adjust December withholding, I have to submit my W-4 by December 15, or probably closer to the 7th to give Payroll enough time to process it and all the other payroll work since we get almost two weeks off in the latter part of December, but the funds I am in issue their distributions during the last week of December, long after I would have had to submit a W-4 to affect my December paycheck.)

So at what point does it switch from "Don't sweat the small stuff" to "You're a fool, Fool!"? 8)

(For those reading along but are new, "fool" without the capitalization is considered bad, foolish; but "Fool" with the Capital F refers to those who adhere to or are learning from the Motley Fool, so "Fool" is considered good.)
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Author: Beth070602 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83768 of 121261
Subject: Re: How much Refund too much? Date: 2/9/2006 11:40 PM
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I'll be thrilled to pieces if I came within $5,000. Our income varies year to year and month to month. And it's tough to make witholdings and estimated payments come out right when a customer mails $100,000 the middle of December.

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Author: catscanner Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83770 of 121261
Subject: Re: How much Refund too much? Date: 2/9/2006 11:57 PM
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You guys all are going to have a sh*t fit about this but my refunds, fed and state, run close to $13k - $15k a year. Yeas, I KNOW that's too much, but assuming $1100 a month put away from February (really, I need the first month to get the $1100) to December and then 4% interest I'm giving up $200 in interest.

This is my way of having a forced savings account.

If I really wanted to save the $200 -$300 a year in "lost" interest income I would just not go out to dinner 5 or 6 times a year.

BTW, Turbo Tax recommends that I change my witholdings allowance to 23 this year. I know that in reality, yes, what real people would do, is that the savings placed in my paycheck every 2 weeks would partially go to pay down debt (mortgage, car loan) but probably would end up having a big portion just wasted.

My refund helps to fully fund my ROTH IRA's and then pay down non deductable interest debt.

cat (who is ducking behind my lead shield, not to avoid xrays but to avoid the flames from the following posters. Just really think about what real people would do.)



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Author: Follydolly Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83771 of 121261
Subject: Re: How much Refund too much? Date: 2/10/2006 2:08 AM
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Happy Fool anniversary cat;)

Personally, if you wish to save by overpaying taxes, at least you are saving some $$ someplace. Lots of folks just spend it all and more.

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Author: snafflekid Big red star, 1000 posts Old School Fool Global Fool Mission Olympia 2 Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83772 of 121261
Subject: Re: How much Refund too much? Date: 2/10/2006 2:43 AM
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cat (who is ducking behind my lead shield, not to avoid xrays but to avoid the flames from the following posters. Just really think about what real people would do.)

You forgot the nuclear option, BOOM!

snafflekid (who is lucky to only have $7000 return this year, whew!)

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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83778 of 121261
Subject: Re: How much Refund too much? Date: 2/10/2006 8:49 AM
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Since I retired I've been able to keep my estimated payments within $100 of what I actually owe. I can usually estimate my interest and dividend income pretty close. It's the capital gains that are unpredictable. I use the worksheet in Pub. 505 for those with uneven income flows. It's a pain but I've finally got it down to where it only takes a few minutes to complete each quarter.


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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83793 of 121261
Subject: Re: How much Refund too much? Date: 2/10/2006 12:50 PM
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No flames here. You know what your doing and why you are doing it. You know the costs of your choice. If it works for you, its fine.

The reality is for some people, this is the way they can save money in a place that can't be accessed for impulse spending.

However, since you're using some of the refund to reduce your debt, I'd suggest taking a look at your debt patterns. Do the credit cards run up a little bit each month, only to be whacked back down with the tax refund once a year? If so (and I have no reason to believe it is for you, but there are lurkers here), your cost is larger than just the savings interest you aren't getting. It is the interest cost on the credit cards.

--Peter

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Author: SDTrond Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83804 of 121261
Subject: Re: How much Refund too much? Date: 2/10/2006 5:42 PM
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I also won't flame, since it works for you.

However, I will point out 2 items:

You say you use part of the refund to fund an IRA. So you will make your 2006 contribution "sometime" after you receive your refund from 2005 -- probably sometime in March?. You can save a month minimum by getting the money back during 2005 and being able to deposit your contribution on 1/1/06.

But -- you have a hard time saving by your own admission. It is good to know thyself, but a little prior planning prevents underperformance...
Get an automation transfer going for $333.33 every month from your checking account over to your IRA. Better yet, transfer another $500 a month over to ING savings, (or to a mutual fund account, or DRIP accounts, etc.) David Bach's Automatic Millionaire is a thought provoking book.

Regards,
Trond

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Author: catscanner Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83808 of 121261
Subject: Re: How much Refund too much? Date: 2/10/2006 9:50 PM
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No flames here. You know what your doing and why you are doing it. You know the costs of your choice. If it works for you, its fine.

The reality is for some people, this is the way they can save money in a place that can't be accessed for impulse spending.

However, since you're using some of the refund to reduce your debt, I'd suggest taking a look at your debt patterns. Do the credit cards run up a little bit each month, only to be whacked back down with the tax refund once a year? If so (and I have no reason to believe it is for you, but there are lurkers here), your cost is larger than just the savings interest you aren't getting. It is the interest cost on the credit cards.

--Peter
-------------------------
agreed. It is something that one has to "manage". One way is to use 0% and/or xtra low fixed rate terms for cards. Currently, 75% of my debt is at 0% ranging from 6 - 12 months in term. The balance is at 4.99% fixed. Whacking away at the 4.99% as fast as possible while managing the 0%'ers does take some effort, but it does worth. I've calculated that in the last 12 months I've saved close to $3000 in unsecured, non deductable interest liablity by rigerously monitoring and doing this. The tough part is that to get these rates you generally need very good, if not excellent credit. Getting to that point took many years.

cat

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Author: catscanner Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83809 of 121261
Subject: Re: How much Refund too much? Date: 2/10/2006 10:00 PM
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I also won't flame, since it works for you.

However, I will point out 2 items:

You say you use part of the refund to fund an IRA. So you will make your 2006 contribution "sometime" after you receive your refund from 2005 -- probably sometime in March?. You can save a month minimum by getting the money back during 2005 and being able to deposit your contribution on 1/1/06.

But -- you have a hard time saving by your own admission. It is good to know thyself, but a little prior planning prevents underperformance...
Get an automation transfer going for $333.33 every month from your checking account over to your IRA. Better yet, transfer another $500 a month over to ING savings, (or to a mutual fund account, or DRIP accounts, etc.) David Bach's Automatic Millionaire is a thought provoking book.

Regards,
Trond
----------------
I'm not sure if I was clear about the savings...I have my ROTH IRA's funded, for both myself and my wife, on a monthly basis, thereby using $ cost averaging for lower my cost basis. I also have @ 75% - 80% of my annual amounts for the accounts funded by year's end. I use the "refund" to top them off.

Additionally I fully fund my 401k each year. The easiest way for my (and I would recommend this to all) is to take your base salary (I'm paid by the hour), multiple by 40 hours a week then by 52 weeks then divide the annual limit into that number and multiply by 100 - giving me the %age that I need to hit the fully funded amount - assuming I don;t work any OT. OT just kicks the funds in earlier and I end up with a small raise in my paychecks for the last month or so of the year. Kinda like a xmas club again. To start, I tell everybody I work with that doesn't do any savings is to start off with 2 or 3%, then ,each year as you get a raise, take half the raise and put it away to the 401k and the otehr half is for you. Within a few years you are close to your max and you don't miss it.

I do auto transfers for the funds needed to cover all of my property taxes (I have 2 rentals and 1 home) into ING accounts. I get the interest instead of my mortgage company. Same for fire and flood insurance. If I really wanted to squeeze it I could do that with auto, life, electrical (I'm on a balanced payment plan - another great idea - every 3 months it's adjusted), etc.

There are tons of ways to game the system, but for me, the tax refund is a forced savings. I don't miss it (other may and need the cash now), I don't miss the 401k, IRA etc funds. But, by gradually increasing the savings amounts, doing it on a regular and somewhat forced way, I live within my "means".

cat


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Author: Mark12547 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83811 of 121261
Subject: Re: How much Refund too much? Date: 2/11/2006 12:35 AM
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Thanks for all your responses!

I didn't mean to stir a hornet's nest.

I see a few hundred in a refund is peanuts compared to some of the refunds I see mentioned in this thread. I'm not going to sweat it. 8)

I also don't believe the IRS is the best place for "forced savings", preferring 403(b) deductions, automated savings (for funding the Roth, among other things) and automated investments, along with developing a mindset that such non-sheltered savings and investments are not to be touched except under very severe circumstances.

Now, I do make loans to the federal government, but for the loans (except for a few hundred dollars of the tax refund) I collect interest, e.g., loans in the form of Savings Bonds and indirectly in a bond fund that has about a third of its assets in Treasuries. (No, that isn't all that I invest in, but that is all that I currently collect rent for the federal government renting my money.)

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 83938 of 121261
Subject: Re: How much Refund too much? Date: 2/14/2006 10:09 AM
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I have my ROTH IRA's funded, for both myself and my wife, on a monthly basis, thereby using $ cost averaging for lower my cost basis.

ITYM "to lower my average cost per share". "Basis" refers to capital gains, which are irrelevant inside an IRA.

But if you're planning to DCA....

Why not put all the money into a Money Market Mutual Fund the first day you are eligible, and then dollar-cost-average from the MMMF inside the IRA into the actual investment? That way you'd earn interest on the money, tax-free!

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Author: Mark12547 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 84079 of 121261
Subject: Re: How much Refund too much? Date: 2/18/2006 3:00 PM
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Two days ago I got an acknowledgment for a 501(c)(3) "disaster relief" contribution (it was a check in excess of $250, so written confirmation was needed), so yesterday I could meet with my tax preparer, who works for a CPA. She told me that, for a few hundred dollars of refund, they don't sweat it for their clients. Now if the amount was great enough to add one more personal allowance to the W-4 and not end up owing too much, they would suggest it.

I don't have the numbers yet, but if I do get a refund (likely), I would probably "squander it away" as part of my Year 2006 Roth IRA contribution. 8)

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